ISLAMABAD, Jan 1: The federal government on Wednesday reduced by 1 to 1.5 percentage points the interest rate on all national savings schemes.

According to revised rates, the return on Defence Savings Certificates, Regular Income Certificates, Special Savings Certificates (Regd)/ Special Savings Accounts and Savings Accounts have been fixed at 10.03 per cent, 9.12 per cent, 8.67 per cent and 5 per cent per annum, respectively, for the certificates issued/ accounts opened on or after Jan 1, 2003.

The finance division, which issued the details, said in a press release that the certificates purchased and accounts opened prior to Jan 1, 2003, would earn profit at the rates prevailing on the respective dates of purchases.

“The government has reviewed the rates of return on various National Savings Schemes and has rationalised them in the context of recent decline in various interest rates in the banking and financial sector,” it said.

To take care of the well-being of pensioners, the government has developed an exclusive scheme which will be announced by the adviser to prime minister on finance, planning and economic affairs in near future.

Despite reduction in rates of return, the real rates of return (adjusted for rate of inflation) on various instruments of the National Savings Schemes range between 2 to 7 per cent which is much higher than the rates of return offered by the commercial banks, the press release said.

Interest rate policy is an important instrument of macroeconomic management. The rate of interest performs several functions in an economy. It affects the savings-investment processes and through it the development and diversification of financial assets, capital intensity of production, and the rate of growth of output. “Interest rate policy is, therefore, the cornerstone of any government’s policy to influence business conditions and economic activity,” it said.

The objective of the monetary and fiscal policy around the world is to keep inflation rate low so that the interest rate can be kept low as well. Low interest rate encourages investment and accordingly promotes growth. Many countries around the world have pursued prudent monetary and fiscal policy and have succeeded in keeping inflation rate low.

Interest rates all over the world have declined in recent years. For example, Libor is currently ranging between 1 to 1.5 per cent as against 5 to 5.5 per cent some two years ago.

In Pakistan, the government has succeeded in reducing inflation through pursuance of prudent monetary and fiscal policy. Currently, the rate of inflation is about 3.1 per cent. In order to bring the entire structure of interest rate down with a view to promoting investment and growth, the State Bank has recently reduced the discount rate as well as the treasury bills rates through market mechanism. It is in this background that the government reviews the rates of return on various instruments of the National Savings Schemes biannually.

Rationalising the rates of return on National Savings Schemes is also a part of the government’s debt reduction strategy, the press release said.